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Abstract

Multinational enterprises (MNEs) are central drivers behind neo-liberal globalisation.
These enterprises are usually centred in developed countries, with competitive
operations in developing countries. The literature on MNEs and foreign direct
investment usually focus on the motivation for investment, decisions on expansion,
the structure of ownership of investment, the mode of entry, and the perception of
risk.
Fluctuation in the exchange rate is a source of uncertainty that affects MNEs' and
other enterprises' market values. Enterprises' exposure to changes in the exchange
rate has increased with the adoption of floating exchange rates and more intensive
involvement in international trade. The conventional belief is that competition in the
export market is positively related to a depreciation of the exchange rate, which will in
turn be advantageous to the stock market, while the opposite is true for an
appreciation of the exchange rate. If the contribution of import or intermediate
imported inputs to the final production were quite large, an appreciation of the
exchange rate will have a positive effect on input costs and the stock market.
This study investigates the exchange rate exposure of multinational enterprises in
South Africa to the bilateral exchange rate of the rand against the US dollar and the
nominal effective exchange rate of the rand. It presents evidence on the direction and
magnitude of currency exposure. From the empirical results presented in this study it
can be concluded that the majority of MNEs are not significantly exposed to either
one of the exchange rate changes. It has also been found that the majority of
enterprises lose market value when their local currency depreciate against the US
dollar, while the majority of South African enterprises are positively related to
changes in the nominal effective exchange rate of the rand.
MNEs that are not significantly exposed to changes in exchange rates could be
subject to three possibilities. (1) The most obvious reason is that enterprises are not
exposed to changes in the exchange rate. Enterprises in liberated (or •open")
countries are more exposed to exchange rate movements as opposed to those in
closed countries, such as the USA. (2) Enterprises could be engaged in on and off
balance sheet hedging activities, which would reduce exchange rate exposures. (3)
The methodology used in a study does not present the correct exposure results.